“Trust Me,” said the 401(k), “a sucker is born every day.”
As early as 1999, while I cold-called my way into a meager existence the first few years at Morgan Stanley, it was obvious 401(k) plans were going to be worthless for workers and a money grab for Wall Street some day soon. I don’t claim any special prescience. I’m just a guy educated at a state school in Houston, born in the Texas Hill Country and a bit of a world traveler. In short: my bullshit detector is pretty sharp.
However, we Americans wanted everything on the cheap. Down here in Texas we say of cheap men and women, “they’re penny wise, but pound stupid.”
Said cheapness, plus an unfortunate conflation between gambling and investing that happened between Reagan and Clinton has led us to stupidity that is legion. The first big scheme of bovine excretions I investigated were corporate sponsored 401(k)s and their claims of the cheap cost ratios and great returns. The price for both assumptions will end up in the trillions before it is all over.
First, cost ratios on managed mutual funds, which are the majority of what Wall Street retail brokers sell (they get a 5% commission) are roughly 2% per year with some as high as 5%. Market-linked annuities (insurance policies with market-like returns) can be even higher. (One good reason for Glass-Steagall to be re-legislated. Insurance companies selling stock-based products as insurance? Huh? That sounds like something guaranteed to blow up in your face. Had AIG failed all the market backed annuities would have as well. These annuities carry a guaranteed rate of return so you can see the problem here, I hope.) But I digress.
Compound the above rates (2% investment fees and costs) and you’ve got a pool of money that Wall Street has created a special beer-bong like contraption so as to drink it all in one gulp. Think Taibbi’s Vampire Squid and your obnoxious brother-in-law Bubba drinking at the Super Bowl party you desperately tried to keep them away from. They love to steal that free beer.
Now, consider how much they salivate (think an English Bulldog on a 90* day type salivation) over the looming privatization of municipal, county and state pension plans? It’s obscene. The pool of money is immense. The cost ratio for one Texas pension plan is as low as Social Security, which is .52% or 52 basis points, last I check. Wall Street can get 2% easily. You see how huge a difference that is? Does it now make sense why their is all this talk of undoing school teacher pension plans, city plans, county plans, state plans: all so Goldman, Morgan Stanley, and a few others can rape the middle class just a little bit more.
But what about stocks? Weren’t they great investments? Sure, if you were an old fuddy-duddy like Col. K. a client of mine at Morgan Stanley. Dude was richer than Croesus, but dressed llike Grandpa Clampett. Every now and then he’d come in and sell 1,000 shares of GE or Ford or Intel. He’d simply forgotten about them and when his bank account got low he’d dig out a certificate and bring it to me to sell. One sale of Intel was half a million dollars. $500,000. His cost basis was $9.12 and he sold it at $74 3/16. So yeah, if you bought stock like that, the market works. But this is America and everyone wants a cheap buck. So they bought Dell at $25 and sold out at $50 three months later. Or Billing Concepts at $7 and sold at $20. The list goes on forever until we get to the bubble bursting and then Intel bought at $75 was then sold at $33. Dell bought at $51 was sold at $16. Investing is like being Pete Rose when he’s not gambling: slow and steady when you’re at bat, collecting singles and doubles like they are pennies and dimes. Pretty soon you’re the champ! Even then there was fraud to be found in Blue Chip stocks, like GE.
We had a saying back in the day: as GE goes, so does America. Before Jack “the Hack” was made CEO this was gospel. But once Jack “The Hack” discovered control fraud and accounting larceny at GE it was only a matter of time. GE was a bellwether for the entire American economy (I cannot stress this enough), but not after Jack left. First, he sold every worthwhile asset the company ever created. All the while he cheated. How? Well, each quarter Welch stolke a penny per share from GE’s supposedly over-funded pension fund and use it to beat the earnings and whisper estimate on the Street. This drove the entire Dow 309 up, up and away.
But then the party was over. Enron collapsed and every bad practice on Wall Street was exposed. Generation X took the brunt of the losses: almost half of the net worth Generation X had accumulated (46%) in the 15 years it had been working a real job, if lucky enough to avoid a McJob, AKA: Temp work, that is, was lost. Baby Boomers fared better because most of their wealth was still wrapped up in their homes. Wall Street found a way to steal that money too.
Boomers saved and then bet it all on their homes and lost. That is reality. Spin it any way you like. Boomers lost at the Blackjack table. Period.
So we’re left with the results and consequences: “we have stagnant wages, whole industries crushed and entire cities decimated by economic collapse. Yet somehow we were individually supposed to have been able to set aside $1.5 million for our retirement.
The first time I saw this film was in Russia, standing on the balcony of a big Khruschev era blockhouse with my soon to be wife, both looking down at the trash area, watching a babushka (literally: grandmother, informally: old lady) rummaging through the garbage. “She’s here every day,” my wife to be said. A year later we got the news she had died. She was 58. She looked 75.
“That could never happen to us,” I thought, true pity stirring in my heart for this old woman.
But then I remember something I saw in Moscow two years prior; Something that has stirred in me a constant feeling of discomfort and often dread.
Upon walking through красный площадь (Red Square) and admiring Собор Василия Блаженного (St. Basil’s Cathedral) I crossed the frozen Москва-река (Moscow River) on my way to Новоде́вичий монасты́рь (Novodevichy Convent) where Peter the Great imprisoned his sister, Sofia Alekseyevna, that she cease challenging his rule. Before me rose a gorgeous stainless column topped off with a Cosmonaut. Here was Yuri Gagarin, first human in space. Let that sink in for a moment: the first human in space.
Empires and great powers fall swiftly now. Modernity is a cruel Olympian god, exacting his tolls immediately and in full. The United States of America, no matter how much it believes it is immune to the rules of history, that it is “Exceptional” is simply a lie we tell ourselves at night like the little boy whistling past the graveyard.
Scenes of elderly poverty, grim and grinding, as bad as those from our Great Depression, will soon become a regular feature in the life of United States citizens.
And that’s only the best case scenario.
